Surprisingly, the history of the lowly baseball card tells a lot about how new "investments" are created and publicity's role in promoting them. The cards illustrate how speculative bubbles form and why they burst. Are baseball cards investments? Are any collectibles? If not, why not? This article tells the story of the cards.
Tobacco, candy, and food companies first printed baseball cards as product promotions in the second half of the 19th century. Production spiked in the 1930's, and again after World War II. From the 1950's to the 1970's, cards cost between a cent and a quarter per pack and could be purchased at any grocery or drugstore. Kids played games with them and attached them to bike spokes. A few adult collectors quietly traded rare antique cards in a tiny market that few even knew existed.
In the 1980's, everything changed. Card values exploded. Even common contemporary issues were suddenly cited as being worth much more than their purchase prices. Convergent trends drove this change:
- The press decided baseball cards were a fun, trendy topic, and hyped them as collectibles. The 1990 Washington Post article "Turning Cardboard Into Cash: These Are Boom Days For Baseball Cards" was typical. This crush of publicity created both popular awareness of baseball cards and a new attitude towards them as valuable.
- Price guides appeared. These provided a necessary market mechanism, widely-disseminated lists of market valuations.
- The financial press profiled baseball cards as investments, citing their fantastic appreciation. The 1988 New York Times Business Section article "A Gram Slam Profit May Be In the Cards" epitomized this trend, relating that "... Prices for collectible baseball cards have risen roughly 32 percent a year since 1978." Articles appeared in Money Magazine, the Wall Street Journal, Forbes, The American Association of Individual Investors Journal, and others.
- Professional grading services appeared, similar to those for rare coins, currency, and stamps. These conferred an aura of legitimacy for "investors" and gave assurances of authenticity and quality.
- All the publicity brought in adults and monetized what was previously just a kid's hobby. Baseball cards became a booming new business. The number of dealers rose to an estimated 10,000 at its peak, with industry sales reaching $1.5 billion in 1992. (Today there are perhaps 200 dealers and annual sales are about $200 million.)
Baseball cards entered a speculative bubble. News of their increasing values became self-fulfilling. Kids in the 1980's and 1990's would buy cards, carefully place them in plastic holders, and track their values in Beckett Baseball Card Monthly (peak circulation one million). As with all bubbles, eventually came ...
A financial bubble occurs when a product trades at a value highly inflated over its intrinsic value. Baseball cards are nothing but printed pieces of cardboard. Anyone can print them in unlimited numbers. This fact came to full fruition when producer Fleer sued Topps in the late 1970's and ended its near monopoly over the use of baseball players' likenesses. New printers flooded the market while keeping their huge production numbers secret. (Upper Deck alone printed an estimated four billion baseball cards in 1991.) Manufacturers diversified into hologram-logo cards, golden-foil cards, rare chase cards, and more. Dozens of competing cards were issued for some players. No one knew what to collect. Product differentiation and premium pricing became the norm.
The bubble and the manufacturers together priced kids out of the market. This meant no more mass consumer. Baseball cards went from being an easy, inexpensive buy at retail stores everywhere to being sold only online or in expensive bulk packages at outlets like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). A kid's hobby was transformed into a business targeting middle-aged males with disposable income, layered with a thin veneer of investing justification.
Lessons from the Bubble
Speculative bubbles can occur with any asset, whether it's tulip bulbs in 17th-century Holland, housing in 2008, or baseball cards. During the mania, "The card companies believed that they could effectively print money ... For a few years, they were right" (Jamieson). Analysts at Forbes and Seeking Alpha compare the collapse to how inflation destroys the value of a currency when a country prints too much. The take-away:
- Promoters invent new asset types to sell to the uninitiated (whether those new assets are complex derivatives, tranched mortgage backed securities ... or simply pieces of cardboard with pictures of sports heroes)
- Those who believe the "sell story" about the new investment set themselves up for a loss
- Only invest in proven markets
- Media focus can drive interest in an asset, creating a bubble
- When enthusiasm for an asset spikes, don't passively trust valuations
- Devise your own metrics for accurate valuation
Readers of Seeking Alpha will find all this obvious, but not everyone remembers it when an asset class takes off. Bubbles happen because it's difficult to see through conventional wisdom. I still recall the disbelief I encountered in 1999 when arguing against the absurd valuations the market assigned to what some promoted as a new asset class -- supposedly subject to new valuation metrics -- they labeled "internet stocks." Many took the extreme valuations of these stocks as a priori proof that they were worth their inflated prices. In fact, the market valuations of those companies had decoupled from their intrinsic values.
Are Baseball Cards Investments?
The market for baseball cards today illustrates both the attraction and the problems with considering collectibles as investments. Let's discuss.
Cards divide into three groups: pre- World War II; postwar to the 1970s; and since 1980. Values are driven by what determines the price of most collectibles: rarity, condition, and demand. The distinction between graded and ungraded cards is critical. With the monetization of the hobby in the 1980s, Professional Sports Authenticator (PSA) and others began professionally grading and certifying cards. This had the same effect it did in the rare coin and currency markets: it separated the values of graded and ungraded specimens.
For example, while cards printed during the deluge of the 1980's in ungraded, used condition are worth little, if anything, some of those same cards officially graded in Gem Mint condition can be worth hundreds of dollars. A Motley Fool article entitled "Have Baseball Card Values Risen in 20 Years?" claims that certain Gem Mint certified cards from the 1980's and 1990's have proven to be good investments. The reason, the article says, is that so few cards attain the highest level of grading when appraised. Thus this Business Insider article advises purchasing nothing but the highest graded cards.
But beware. The numbers of highly graded cards can change. Many owners don't care about getting their collection graded or aren't willing to pay grading fees. If they change their minds, their cards enter the available supply, and prices can quickly change. Buying pre-World War II cards reduces this risk. Even then a big find can upset valuations. Rare coins, currency, and stamps are all vulnerable to unpredictable supply-side market disruption when a big hoard surfaces.
Baseball cards have some advantages. They're small, portable, and easily stored. The internet challenges the traditional view that collectibles are illiquid. Online auctions are quick, convenient, and inexpensive. They avoid dealer markup by providing a direct buyer-to-seller market mechanism. Cards are easy to ship between buyers and sellers. Owners can enjoy their assets, just as art collectors enjoy their paintings.
Collectibles can diversify a portfolio. This investigation finds low correlation between baseball card values and stocks. Similar research shows that collectible art has little correlation to stocks. If you're worried about inflation or the future value of U.S. currency, many cite collectibles as good hedges. This study finds that baseball card values have easily outpaced inflation since 1981. Forbes reports that vintage baseball cards held value better than stocks during the 2008-2009 financial crisis.
Among the downsides to collectibles like baseball cards is that you can only enjoy them visually. Handling them degrades their condition and destroys value. Maintenance costs may include grading fees, secure storage, and insurance.
Baseball cards are like fine paintings and differ from collectible coins or currency in that they have no intrinsic bullion or monetary value. A one dollar U.S. gold coin made between 1849 and 1889 contains 1.672 grams of gold. At $1,446 per ounce, that's about $70 in gold bullion. And it's still legal currency. You can't melt down or spend a baseball card.
Nor were baseball cards developed with the goal of preventing counterfeiting or tampering. They're simply printed cardboard. Join an online card forum like Net54Baseball and you'll see lots of concern about authenticity. Recently an auctioneer admitted to altering the holy grail: a $2.8 million 1909 Honus Wagner card. Pricing can be suspect, too. Many argue that the standard references reflect dealer hopes for high prices. In the internet era, web guides like VintageCardPrices and SMR Online tell the real story on pricing. Finally, grading is subjective. And a minor difference in grade can hugely affect valuation.
Perhaps the strongest argument against baseball cards as an investment is that they've been an unstable market with a short history. Cards have only been monetized since the 1980's and they haven't proven a reliable store of value.
Are Collectibles Investments?
This begs the larger question of whether collectibles -- of any kind -- are good investments. Investment advisers say no. Physical assets do not provide income like bonds or dividend stocks. They have no cash flow. Add in maintenance costs, and you've got expense without income. Nor do collectibles offer the preferential tax treatment of some financial investments.
Emotional attachment complicates collectible investing. To compare investment opportunities, you must compare potential rates of return over some period of time. Many argue that collectibles make poor investments because their future returns are unpredictable. They view collectibles as speculation rather than well-planned investment.
The book Collectible Investments for the High Net Worth Investor suggests that collectibles may not be good investments for most people, but that the equation changes for wealthy individuals. Rich investors have different diversification needs and can better handle the risks. They can also afford to buy the most elite collectible specimens, which typically hold value better than the mass of common items. This has historically been true for baseball cards. Individual cards and sets in the 6 to 7 figure range have proven to be financially worthwhile over the years, while less expensive items have very mixed records.
So, if you buy collectibles, have fun. But don't delude yourself into thinking that you're investing. Unless you're a very rare bird -- you're not. If you insist on contradicting expert advice and investing in collectibles anyway, a better choice than baseball cards might be a collectible with a stronger historical track record and a larger international market.
For more on the baseball card bubble, read Card Sharks: How Upper Deck Turned a Child's Hobby into a High-Stakes, Billion Dollar Business by Pete Williams, and Mint Condition: How Baseball Cards Became an American Obsession by Dave Jamieson.